In December, even as energy prices were spiking on colder-than-normal temperatures, Prenova's analysis pointed out a number of bearish indicators in the energy markets. Despite expected skepticism from some, we predicted a 33% decline in prompt month prices by the end of the winter heating season. So how are we doing with this prediction?
Following that very cold December, January temperatures were warmer than normal in many key regions. This eased demand for energy and caused prices to fall by 8.6% through February 1st. Then some colder-than-normal temperatures in early February increased demand for natural gas once again, causing concern that the March NYMEX prompt-month price would rise. But due to the aforementioned bearish forces, natural gas prices continued to fall, declining another 990 basis points thru the end the month, down about 18.5% from the December highs.
So, here we are near the end of March. We've been waiting patiently, and the NYMEX prompt-month price has now declined by nearly 31% from the highs experienced in December. The April 2010 contract expires in a little over a week, and the prompt month price of $5.996 per mmbtu on December 28th has now fallen to $4.086 per mmbtu as of March 18th.
Why did this happen? Well, it's simple. The fundamentals of supply & demand kicked in.
- Even with colder-than-normal temperatures this winter, there has been ample natural gas production and more than enough storage to accommodate demand.
- Advancements in the process of extracting natural gas from shale formations have significantly increased reserves, boosting production yields and capacity.
- Continuing recessionary pressures have limited demand for natural gas from the commercial and industrial sectors.
There are a few other factors, but suffice it to say that both natural gas supplies are abundant and demand is down. As a result, we're seeing prompt and forward 12-month natural gas strip prices at six-year lows. While we believe the outlook for natural gas is still bearish, we also see less downside opportunity and greater upside risk.
Natural gas underground storage currently stands at 1,615 bcf. To reach an end-of-season storage level of 1,350 bcf, withdrawals would need to average 88 bcf per week for the remainder of the heating season. For the last five years, late season withdrawals have only averaged 19 bcf per week, and the 15-year average is only 27 bcf per week. So it's very unlikely we'll get as low as 1,350 bcf. This means natural gas prices should stay at or near $4 per mmbtu for the next few month.
Electricity prices are tied to natural gas prices, so look for prices to remain low through April and May. We will see the typical Spring Bounce in prices as we move into June, when the peak electric consumption season begins.
Oil futures are slightly over their recent trading range of $70 to $80/bbl, in part bolstered by OPEC and IEA announcements raising their projected oil demand levels in late 2010 on improving global economies.
In this edition, Michael Roberts, Prenova's lead energy analyst updates his market forecast based on recent data from the U.S. Energy Information Administration and other sources.
Michael Roberts reviews natural gas storage and production data recently reported by the Energy Information Administration and discusses how this data will likely affect energy prices in the coming months.
Commodity futures have rebounded a bit after bottoming out in the late August, early September timeframe. Still, energy prices are at the lowest they've been since 2002. The fall off in prices is being driven in large part by a decrease in demand due to current economic conditions. The higher consumption that resulted from cold weather earlier in the year has been more than offset by the recession. Other factors influencing prices include a cooler-than-normal summer across most of the country, and a relatively quiet hurricane season.
Wholesale energy prices have fallen significantly this year, with the prompt months dipping by over 70% vs. the all-time high prices in July 2008. In April 2009, natural gas futures bottomed out and rebounded slightly in mid-June as we entered the summer, which is the peak electric consumption period. The markets then traded relatively flat, but again hit new lows for 2009 in late August and early September.
The September 2009 contract recently expired at $2.843/MMBtu, the lowest contract expiration price since March 2002, when it was $2.38/ MMBtu. The October 2009 contract followed suit and traded below $2.50/ MMBtu for a short period before speculation drove prices back up.
Oil futures bottomed out in December 2008 and traded relatively flat through mid-March due to weaker worldwide demand for oil. But they have rebounded significantly as the result of OPEC production cuts, the return of speculative trading from hedge funds, and anticipation of new demand for oil as global economies recover. Oil futures are up over 80% from their lows in the mid $30/bbl back in December, with current prices in the $68-$73/bbl range.
Fortunately, oil prices do not impact utility rates to a significant degree. Natural gas fundamentals are dominating futures prices, with oil prices having minimal effect. This is fortunate, because while oil prices are shaped by global events, fluctuations in natural gas prices tend to be regional.
As stated above, the hurricane season has been uneventful thus far in 2009. More important than not having any named storms before August 1st is the fact that we've only had six named storms (two strengthened to hurricane status) as of September 18th. And meteorologists have concluded that most hurricanes in the Atlantic basin this year are unlikely to impact the natural gas and oil producing regions in the Gulf of Mexico (where 40% of U.S. natural gas production originates).
Recent wholesale market price trends influenced wholesale electricity rates from coast to coast, especially in deregulated regions, which were up between 18% and 33% in 2008. Regions with ample sources of nuclear and
hydroelectric generation experienced smaller price spikes than those with coal and natural gas-fired generation.
Where electricity is regulated, utilities have either raised their rates already or are keeping rates the same in 2009 until the prior year's under-collections are trued-up.
Graph courtesy Energy Information Administration